Dcf Tutorial

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A Tutorial on Discounted Cash Flow, Fall 2015 Notes prepared by John Tsagarelis, jtsagare@uwo.ca DRAFT: Comments, Suggestions Welcome 9/20/2015 Preamble As we walk through life we develop mental maps of situational settings. These are not sight patterns, but rather decision patterns among choices available to us in any given circumstance. For example, we take familiar roads to our summer cottage or accept return-on-equity is an unbiased stock return predictor. Once we form a map, it is hard for us to realize it may be incorrect and/or to imagine alternative scenarios. This lack of flexibility in decision making is as dangerous as following maps on our satellite-based navigation devices that fails to account for new roads. We…show more content…
Imagine for example, we collected device volume growth and capital efficiency ratios for Blackberry one year before the introduction of the iPhone. In other words, what if investors can’t form priors on the distribution of future outcomes? For Friedman, lack of knowledge justified k% monetary policy rule (Friedman (1960)). For as physicist Richard Feynman once said: “It is not what we know, but what we do not know which we must always address, to avoid major failures, catastrophes and panics. Issues to consider include: are we dealing with a domestic US utility company? Is our population base/energy users growing or is it flat? Does our utility generate electricity presuppose hydro power? Are sales for our company generated domestically or internationally? Is it a near monopoly? Are patents involved? Are sales linked to oil/gas? government contractor? health care industry? Each industry has certain competitive forces associated with it and by understanding those sector considerations it makes for easier interpretation of historic financial data. What about new industries? Uber? Amazon, Spotify? maybe ignorence is bliss? Companies are living, breathing objects. There performance is not created in a vacuum but rather the result of a good/service that may or may not be in demand. Distribution channels and competitive forces converging to create sales, margins, profits. A contextual understanding will
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